A three minute talk to integrated assessment modelers associated with the Department of Energy

DOE is funding a research project joint with Wolfram Schlenker and Maximillian Auffhammer.  I just gave a 3 minute talk and a poster about one piece of this work.

What can one say in three minutes?

Not much:

I'm Michael Roberts of North Carolina State University and I'm going to talk very briefly about one part of a larger set of projects by myself, Wolfram Schlenker of Columbia University, and Maximilian Auffhammer of UC Berkeley.  I should say: we all are very much on the fringe of IA modeling.  We are more accurately described as applied econometricians—our focus is on statistical measurement of the key economic parameters that might feed into IA models.

The focus of this part of the project is to estimate supply and demand elasticities for calories derived from the world’s four most important staple food commodities: rice, wheat, corn and soybeans.  These four crops literally feed the world—they comprise about 75 percent of caloric production of food-related crops worldwide.  They also comprise the great bulk of productive cropland worldwide.   And about 10-15% of corn is used in production of ethanol.

The elasticities of supply and demand for these crops are the crux of the empirical economic science underlying many impact analyses.

To illustrate how demand and supply elasticities matter for an important question I've put up an economics 101 analysis of ethanol subsidies.

The supply curve shows how the quantity of calories produced increases as prices increase.

The demand curve shows how the quantity consumed decreases as price increases.

The intersection of supply and demand are what we observe in the world market place.

A shift in demand, say caused by ethanol subsidies, will cause the quantity produced to increase and the quantity supplied to decrease [price to increase (not sure what happened there)], but will cause the quantity going to food production to decrease.

The sizes of these effects depend of the slopes of supply and demand--how steep or flat each curve is.  This is what we are estimating.

The challenge with estimating supply and demand is that we don’t observe these curves in the real world.  All we observe are the intersections supply and demand, and all kinds of things observable and unobservable shift both curves, which makes it hard to estimate the slopes of the curves.

We develop a novel solution to this problem.  What we do is identify both supply and demand using the weather.

Using weather to identify demand is an old idea but it has rarely been applied.  To our knowledge it has never been applied on a large scale for any one of these key crops, let alone all of them.

Using weather to identify supply is a new idea, but it follows very naturally from the theory of competitive storage.

In a nutshell, here's the idea:

(1) Weather causes exogenous and nearly random shifts in supply and allow us to identify the demand curve.

(2) And because weather-induced shocks to production cause adjustments in inventories, they affect expected prices in the future, which causes a supply response, and allows us to identify the supply curve.

Here's a snapshot of what we found:

Globally the demand elasticity for these crops combined is about 0.05 and the supply elasticitity is about 0.10, perhaps a little larger.  Both of these elasticities are far greater than they would be if estimated using traditional econometric methods that do not account for the joint-dependency of prices on supply and demand.  If applied to US ethanol policy, they suggest US ethanol subsidies have caused about a 30% increase in prices for these key commodities and about a 35 million acre expansion of cropland worldwide.  That's about the size of North Carolina, the state where I live.